The Morning Brief:

Bruce Carson - December 6, 2017


Economy—Bank of Canada, Interest Rates and Economic Data—Economic Effect of the New Mortgage Stress Test

Bank of Canada, Interest Rates and Economic Data—Don Pittis writing for CBC yesterday, discussing the possibility of an interest rate hike today by the Bank of Canada made the point that just because the announcement today comes via paper release with no news conference, does not mean there will not be an increase. He pointed to the increase in September as precedent for a rate hike without a verbal explanation coming from Governor Poloz.

The September raise in rates occurred shortly after the announcement that GDP had shot up to 4.5% and the thought was a hike was needed to put rates back where they were before they were cut to help the economy deal with the crash in oil prices. A hike today would presumably move rates from 1% to 1.25% as they would move back to a more normal level.

While a majority of economists polled do not believe there will be a hike, the economic data released during the past week has been positive. The most positive were the job numbers that came out on Friday. The data shows 79,500 jobs created in November and the unemployment rate falling to 5.9%. Predictions were that only 10,000 new jobs would be created and the unemployment rate would 6.2%. Subject to a downward revision as these numbers came out just a day after the end of November, they show that the economy still has a lot of life left in it.

Jobs were created in manufacturing, retail, wholesale and education services. Full time jobs were up 29,600 and part time increased by 49,900 jobs. Cumulatively over the last twelve months, 400,000 jobs have been created. It was also noted that wages had increased.

Another announcement on Friday had economic growth for the third quarter coming in at 1.7% beating the expected number of 1.6%. While there was a drop in exports, consumer spending still powers the economy with an increase. It should be noted that government spending was up 13% adding 0.5% to growth. This is borrowed government money making its way into the economy adding to the deficit. Also of concern should be that according to numbers released last week by the OECD while Canada leads the G7 in economic growth, it also leads in household and government borrowing.

And yesterday Statistics Canada put out the most recent trade numbers and they show that Canada’s trade deficit has been reduced to $1.5Billion. Petroleum and canola exports are up while imports are down 1.6%. Energy exports to the United States are up as is Canada’s trade surplus with the U.S. by $3.5 billion. In the realm of international trade surpluses this amounts to a rounding error and should not affect the NAFTA talks. It was noted yesterday that these numbers show a positive sign with increased exports, something Governor Poloz has been looking for since oil prices went down.

On the negative side concern was expressed about the decrease in imports. Scotiabank commented that this is a sign of weakening business investment stating “imports of industrial machinery fell by 1.9% month over month in value terms and declined for the third time in four months.”

So the most positive data for the Bank in making a decision on rates has to be the job numbers.

Pittis in his article, based on the above data asks the question “if not today, when” for a rate hike. He points to the strong job numbers which will result in a tightening of the labour market and presumably with labour in short supply, wage increases. There are also hikes in the minimum wage, all of which will contribute to increased inflation. Pittis writes “there is some chance the governor could use the stunning increase in jobs to do something similar (as in September), taking the opportunity to raise rates a little before a cooling economy strengthens the hand of opponents.”

Gordon Isfeld writing in the Financial Post on Monday made the point that the January interest rate announcement is accompanied by the Bank’s Monetary Policy Report and a press conference, making it a more ideal time to hike rates. He also mentioned the continuing uncertainty caused by the ongoing NAFTA talks. He quotes Avery Shenfeld of CIBC as saying “with NAFTA talks not going well and the economy seeing some signs of moderating, there’s no rush for Poloz to hike again. We expect a stand-pat stance until April—letting the Fed make the next move—will take a couple of cents off the dollar.”

So all of the above to say that it is quite probable, based on the views of economists, that interest rates will remain as they are, at least until January.

Economic Effect of the new Mortgage Stress Test—A report released yesterday from Mortgage Professionals Canada dealt with the new mortgage stress test which comes into effect on January 1, 2018, concluding that 100,000 people will fail the test, but of that group about 50-60,000 will be able to buy a cheaper home and pass the stress test.

Under the new rules uninsured borrowers from federally regulated lenders must have their finances stress tested and be able to pay mortgage payments should rates move 2% higher than they are now. The report argues that the test proposed is too high and should be at a rate of .75% higher than rates are now.

While this test and other measures were brought in to save potential home buyers from themselves, one wonders by putting the test as high as it is, whether thought was given to its effect on the construction industry and the real estate industry which have been driving the Canadian economy since the fall of oil prices? Home prices have already fallen in Toronto are the surrounding area.

Other National Issues

Replacing the CF-18 Fighter Jet

Late yesterday news leaked out that Canada will not be buying 18 Boeing Super Hornet fighter jets but will be bridging the so-called capability gap with the purchase of up to 30 used F-18 jets from Australia. The rejection of the idea of buying new Boeing jets results from the trade complaint lodged with the U.S. Commerce Department by Boeing against Bombardier.

The Australian jets are only slightly newer than the ones presently in use in Canada. Remembering back a few months the Trudeau government discovered this “capability gap” in order to put off making the choice of a permanent replacement for the CF-18s. Until the gap was discovered there was a repair and refurbishment plan in place that would see the jets in operation until replacements were in service. As many have speculated all of this is so the F-35 fighter would not be chosen to replace the CF-18s.

Former Chief of Defence Staff Tom Lawson has made the point many times that this exercise of buying interim jets is a waste of money and the government should get on with the process of finding a permanent replacement. As it stands now the competition to find the new jet will take place in 2019. One would think that a cash strapped government, operating on borrowed money, would not want to buy jet replacements twice and would get on with the permanent replacement next year, regardless of the promises of the prime minister not to go near the F35 stealth fighter jet.

To come

--today, Assembly of First Nations Chiefs Assembly continues in Gatineau, Quebec
--today, Bank of Canada deals with interest rates
--today, the inquiry into missing and murdered Indigenous women and girls concludes meetings in Thunder Bay
--December 7, building permit numbers for October to be released
--December 10-11, fed-prov and territorial finance ministers meet to divide up the marijuana economic pie
--December 11, voting in four federal byelections
--December 11-15, NAFTA negotiators meet in Washington
--December 12-13, U.S. Fed meets
December 14, Bank of Canada Governor Poloz delivers a speech to the Canadian Club in Toronto--bc

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